Pottery Barn 2005 Annual Report Download - page 26

We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of
the Sarbanes-Oxley Act of 2002.
We have evaluated and tested our internal controls in order to allow management to report on, and our registered
independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-
Oxley Act of 2002. We have incurred, and expect to continue to incur, significant expenses and a diversion of
management’s time to meet the requirements of Section 404. If we are not able to continue to meet the
requirements of Section 404 in a timely manner or with adequate compliance, we would be required to disclose
material weaknesses if they develop or are uncovered and we may be subject to sanctions or investigation by
regulatory authorities, such as the Securities and Exchange Commission or the New York Stock Exchange. Any
such action could negatively impact the perception of us in the financial market and our business. In addition, our
internal controls may not prevent or detect all errors and fraud. A control system, no matter how well designed
and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of
the control system will be met.
Changes to accounting rules or regulations may adversely affect our results of operations.
Changes to existing accounting rules or regulations may impact our future results of operations. For example, on
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, “Share
Based Payment,” which requires us, starting in the first quarter of fiscal 2006, to measure compensation costs for
all stock-based compensation at fair value and record compensation expense equal to that value over the requisite
service period. This accounting rule is estimated to have a negative impact of approximately 10% on our fiscal
2006 diluted earnings per share alone. A change in accounting rules or regulations may even affect our reporting
of transactions completed before the change is effective. Other new accounting rules or regulations and varying
interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future
changes to accounting rules or regulations or the questioning of current accounting practices, may adversely
affect our results of operations.
Changes to estimates related to our property and equipment, or operating results that are lower than our current
estimates at certain store locations, may cause us to incur impairment charges.
We make certain estimates and projections in connection with impairment analyses for certain of our store
locations in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”
We review for impairment all stores for which current cash flows from operations are negative or the
construction costs are significantly in excess of the amount originally expected. An impairment charge is
required when the carrying value of the asset exceeds the undiscounted future cash flows over the life of the
lease. These calculations require us to make a number of estimates and projections of future results, often up to
20 years into the future. If these estimates or projections change or prove incorrect, we may be, and have been,
required to record impairment charges on certain of these store locations. If these impairment charges are
significant, our results of operations would be adversely affected.
We must properly account for our unredeemed gift certificates and merchandise credits.
We maintain a liability for unredeemed gift certificates and merchandise credits until the earlier of redemption,
escheatment or seven years. After seven years, the remaining unredeemed gift certificate or merchandise credit
liability is relieved and recorded within selling, general and administrative expenses. In the event that a state or
states were to require that these unredeemed certificates and credits should be escheated to that state or states,
then our business and operating results would be harmed.
We may experience fluctuations in our tax obligations and effective tax rate.
We are subject to income taxes in many U.S. and Canadian jurisdictions. We record tax expense based on our
estimates of future payments which include reserves for estimates of probable settlements of foreign and
domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The
results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues.
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